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The Eurozone in Crisis: Solutions and Future Prospects

The future of the Euro and European fiscal policy was discussed by participants of international conference The Eurozone in Crisis: Solutions and Future Prospects which was held on April 4 in Villnius, Lithuania.

Participants, among them Richard Durana from INESS, shared their visions with the audience of policymakers, business professionals and journalists.

The first part of the conference was started off with a statement by Prof. Ramūnas Vilpišauskas, the director of Institute of International Relations and Political Science, who indicated the lack of structural reforms and fiscal imbalances in many EU countries as the main causes for the euro zone crisis. Even though the European Monetary Union was created based on the convergence principle among the member states, the so called “muddling through” with reforms and fragmentation of the common market actually prevented the catching-up of less competitive economies.

Mr. Vilpišauskas concluded that the best cure for the crisis would be balancing government finances, introducing structural reforms and increasing competitiveness in the member states. One of the scenarios could include some sort of fiscal union. It is also possible that some countries might need to leave EMU.

Marius Dubnikovas, the President of Lithuanian Financial Brokers Association, followed discussing market response to the EU debt. He argued that price changes in the stock markets showed the beginning of the crisis 6-8 months in advance. The Europe of “two paces” was discussed: Western Europe with a high government debt and a slower GDP growth and Eastern Central Europe with a low government debt and a faster GDP growth.

Even though Western European countries are still considered to be reliable debtors, the risk of contagion is already in the air, whereas low debts of Eastern countries looks promising and is associated with a much higher growth expected in 2012. The stock markets have been recovering for the last 3 months, which shows that the economies are recovering as well. Mr. Dubnikovas concluded that we are experiencing the last phase of the crisis where it is up to the governments to solve their debt problems.

The last statement, delivered by Rūta Vainienė, Senior Fellow at the Lithuanian Free Market Institute, focused on the pros and cons of joining the euro zone. She noticed that attempts to satisfy all the criteria in order to join the euro zone are already the factor that encourages fiscal discipline and reduces political risks. However, Lithuanian politicians, who still strive for Lithuania to adopt the euro in 2014, shut their eyes to serious euro-related problems.

Although there seem to be many advantages in theory (no conversion expenses during transactions, lower interest rates, higher competitiveness, etc.), Ms Vainienė finds many of them mercantilist and sometimes overrated, whereas the disadvantages are fewer, but of heavier weight: the fact that euro was based on political agreement rather than on any stock and the moral hazard euro creates – the possibility for some to free ride on the account of the responsible ones.

Referring to the previous statement of Mr. Dubnikovas, Ms Vainienė argued that even if we were currently experiencing the last stage of the crisis, it would be the hardest and the longest one, because the problems of government finances are the most difficult ones to cope with. Having the national currency pegged to the euro is enough to be concerned about the future of the euro, because the quality of euro affects the quality of income and savings, as well as exports to the euro zone members. It was concluded that the best money is the money chosen by people and not the government.

The statements were followed by two brief commentaries by Taavi Rõivas from the European Affairs Committee of Estonian Parliament and Desislava Nikolova from the Institute for Market Economics in Bulgaria, presenting the Estonian and Bulgarian perspective on the euro zone debate respectively.

According to Mr. Rõivas, the greatest cause of the euro crisis is not suffiient austerity measures, as 23 out of 27 EU budgets are still increasing, the majority of them having big government deficits. Various stability mechanisms and firewalls seem to be the painkillers for the disease, but they do not deal with the roots of these problems. In the case of Estonia, a balanced budget seemed to be a necessity even without Brussels’ provisions. However, Mr. Rõivas argued that the euro had definitely made the country more reliable for investors and big investments from foreign countries in the last year were linked with the adoption of euro.

On the contrary, Desislava Nikolova has presented quite a different view from the Bulgarian perspective. Until the financial crisis, the adoption of euro was one of the primary objectives for Bulgarian politicians. However, in the last 2-3 years the situation has changed. Having calculated the costs and the price tag of the euro adoption for the 12 year transition period in terms of paid-in capital and issued guarantees, the institute sees no more incentive for Bulgaria to join the euro zone. Ms Nikolova also discussed possible exit strategies from the currency board, one of them being re-pegging the Bulgarian Lev to gold.

The second part of the conference had a panel discussion, moderated by Rūta Vainienė. The participants discussed their views on the euro-related problems and possible solutions of the crisis, as well as the future perspectives of the euro zone.

Mindaugas Leika from the Bank of Lithuania argued that the European Stability Mechanism is a way to strengthen euro and solve problems of liquidity, but only when structural reforms by the governments follow.

According to Dr. Jiří Schwarz, from Liberální Institut in the Czech Republic, euro is a currency for good times. He criticised the European Central Bank‘s policy of easy money and low interest rates, which caused the overheating of the economy, and the fact that the ECB reacted to the crisis as a political body and not as an economic one, by intervening and buying government bonds on secondary markets.

Dr. Richard Durana from the Institute of Economics and Social Studies in Slovakia, presented a Slovakian perspective on the euro zone. He addressed the freeriding problem and soft rules of Maastricht criteria enforcement and associated penalties. Being one of the poorest countries in the euro zone, Slovakia now has to help bailout more reckless and irresponsible countries. Moreover, even though euro promises cheaper loans, the Czechs still borrow cheaper.

Regarding possible solutions to the current crisis, it was generally agreed that following the Maastricht criteria and introducing structural reforms, which would revive the economies of the member states, are the main solutions to the current crisis.

Prof. Ramūnas Vilpišauskas also mentions increasing competitiveness and pushing the countries such as Greece for structural reforms. Mindaugas Leika argues for the need of a closer union and a redistribution mechanism, which is underway. Though it is unclear how the fund would work in the long term, it is currently necessary. Desislava Nikolova doubted the need of the ESM in the light of other financial institutions such as the IMF or the World Bank, which provide financial assistance in return for structural reforms.

Richard Durana argued for the need to allow government bankruptcies instead of bailout policies, because it would force politicians behave responsibly. Moreover, it would strengthen the euro. Arguing from the Czech perspective, Dr. Schwarz noted that striving to fulfil the Maastricht criteria is valuable per se, but currently the monetary policy of the Check Republic is sounder than that of the EU and the level of inflation is lower, so there seems to be no incentive to join the euro zone.

It was argued that the lack of democratic processes in the EU which the new mechanisms are leading to, is starting to remind people of the Iron curtain.

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